Regressive but fair

I have to wonder why the publication of the Institute for Fiscal Studies’ report today came as such a surprise. The report considers whether the effects of the June 2010 Emergency Budget, in isolation, were regressive. We knew the answer to this already. The changes were predominantly cuts in benefits. Benefits, by their very nature are given to those on low incomes, and have little to no effect for those on high incomes. It is obviously impossible to cut spending where you currently spend nothing, thus any cut to benefits is likely to be regressive. The important issue is not who can lay the strongest claim to the progressive banner, however, it’s whether the Budget was the right thing to do. Better than ask whether it was progressive, ask whether it was fair.

The two are distinctly different. Progressive simply means taking more from those who have more, which is normally synonymous with being fair. The VAT rise, for example, is an example of a progressive measure. It is effectively a tax on disposable income, which hits big spenders harder. People who earn more tend to spend more on non-essential items, so take a bigger proportional loss to their income. Either way, taxing what people have left after they’ve paid for their food, shelter, and children seems a lot fairer than taxing their initial income.

The IFS do not dispute this, rather the big measure labelled as regressive is housing benefit. This has received two major changes. The first is a cut in the amount of money available. Previously you could claim up to the 50th percentile of local rents from the government, allowing you to live for free in the median house in your area. Osborne reduced this to the 30th percentile. The second was a cap, set at the 4-bedroom rate, stopping people claiming for particularly high rent areas. Unquestionably this hurts the poorest hardest, as they claim housing benefit. But is it unfair, and does it really cut their income?

On the fairness question, the answer seems pretty clear. We were living with a status quo where housing benefit paid for you to live in a house better than that which many who didn’t claim could ever afford. Not only that, if you played your hand right you could end up with a house in Kensington far beyond the reach of most working households. The June measures put an end to what previously allowed for unfair behaviour, and about time too.

The IFS approach is to treat this cut as a cut in income. On the surface it obviously is money received, but is it comparable income we should be using to decide the fairness of a Budget? Housing Benefit exists to pay for your house, and should not earn you a penny more. Instead of the State providing you with a home, it simply pays you the cost of it. Were the state to pay directly rather than through claimants this would have no effect on income at all, and critics should bear this in mind. The Housing Benefit changes allocate accommodation more fairly, and have no impact on the cash in a claimant’s wallet.

The other regressive change was National Insurance. The June Budget increased the NI threshold by £21, saving some lower middle income workers from paying NI. This has no effect on the unemployed benefit claimant, so is by definition going to be regressive. Does that mean it’s a bad idea? The measure is designed to stimulate private sector employment, particularly at the wage level of those most at risk of losing a public sector job. It’s not a gift to the wealthy, rather a way of encouraging job creation for those most at risk of unemployment.

The changes made in the Budget undoubtedly cut more as a percentage of income from those who earn least. But we should bear in mind this was not a standalone budget, rather a set of amendments to an existing one. If these changes were presented as a replacement to the March Budget they would of course be unacceptable – they simply do not constitute a Budget in themselves. However if we consider them as they are, as amendments, are they fair ones? They tax the richer harder than the poorer, and put an end to the possibility of claiming ludicrously unnecessary sums for housing. Seems to me just what a government should be doing.